Leaders Try to Reassure Israelis That Economy Not Being Neglected

With Israel’s economy being likened to a ship tossed on the high seas, key economic policy-makers are trying to reassure the nation that someone is at the helm.

In what was viewed as a reconciliation meeting, Finance Minister Silvan Shalom and Bank of Israel Governor David Klein held talks Wednesday on ways to stabilize the economy.

In a joint statement, the two reiterated their commitment to price stability and to meeting the government’s 2002 budget deficit target as ways to create jobs and contribute to economic growth.

They also promised better cooperation and closer coordination between the government and the Bank of Israel.

In a sign of this renewed commitment, Shalom and Klein were due to meet Thursday with Prime Minister Ariel Sharon on Sharon’s return from abroad.

Wednesday’s meeting between Shalom and Klein was their first in several weeks. It was called after Klein’s unexpected move on Sunday to raise interest rates by 1.5 percent failed to stem the shekel’s slide against the dollar.

For most of the week the exchange rate hovered at about five shekels to the dollar.

The fact that the meeting even took place was seen as significant, as tensions have been high recently between the country’s two key economic policy-makers.

Their public disagreement over almost every aspect of economic policy — the government’s economic austerity plan, the deficit and interest rates — was seen as a factor in the current crisis of confidence in the economy.

“The rift between the governor and the finance minister has a negative impact on price stability and the markets,” Justice Minister Meir Sheetrit, a former finance minister, said this week. “The ship of the economy is foundering among high waves, and the captains are fighting with each other. The government must join hands with the governor, rather than fighting him.”

Following Wednesday’s meeting, Shalom acknowledged the need for cooperation.

“No one expects us to agree on every issue. But I think that when there is a disagreement, it should stay at home, inside,” Shalom said. “Our purpose is to do what has to be done: to join hands. We have one country, one economy, and citizens who expect that this is what should be done.”

Klein said he hoped the meeting would mark the beginning of a new era in relations between the Bank of Israel and the Finance Ministry. He did not rule out raising interest rates again in the future, if necessary, to stabilize foreign currency trading.

Reports speculated that two policy steps that might come out of the meeting would be the issuance of dollar-linked bonds and the raising of interest rates.

Despite the reassuring message from the Shalom-Klein meeting, it was clear that a “kiss-and-make up” photo opportunity wouldn’t be enough to help the Israeli economy get a handle on high unemployment, inflationary forecasts and fear of investor flight in the face of the ongoing Palestinian intifada.

Also on Wednesday, a Finance Ministry committee issued a long-awaited report on proposed tax reforms. Its main proposals are a tax on capital gains and the gradual reduction of the tax burden on wages.

Previous proposals to tax stock market profits have been defeated. Announcing the proposed reforms Wednesday, Shalom said he hoped they would be implemented quickly and, unlike previous proposals, “not end up gathering dust on the bookshelf.”

Among the recommendations are a capital gains tax, at different rates, for stock market profits, savings plans and deposits. Direct taxation on income would be reduced. The maximum tax a worker would pay would be 49 percent of his salary, as opposed to the current maximum rate of around 60 percent.

According to the panel, the middle class would gain most from the reforms, with its tax burden decreased by around 10 percent.

The proposed reforms must first be approved in the Knesset’s Finance Committee and then pass the Knesset before becoming law.

The changes in the plan would be spread over a five-year period beginning Jan. 1, 2003.